How Much House Can I Afford?

If you are thinking about buying your first home you probably have a lot of questions on your mind. It’s not like you learn this stuff in school. Fortunately, you are a financial genius and came to YoBucko for all the answers. In this article, we are going to show you what you need to know about buying your first home by answering five common first-time home buyer questions:

How Much House can I Afford?
  • Is this the right time to buy a house?
  • How much should I save for a down payment?
  • What are the costs of buying a house?
  • How much house can I afford?
  • How much will my first mortgage payment be?

Is this the right time to buy a house?

Buying a first home is as much a personal decision as it is an investment decision. So before we launch into the financial considerations I want to ask you a simple question: is it the right time to buy a house … for you? Perhaps you are tired of living with roommates, maybe you can’t stomach the thought of sending another rent payment to your landlord, or maybe you and your spouse are looking for a good place to raise a new child. The money doesn’t matter much if it is not the right time to buy a house for you.

From a financial perspective, I believe now is one of the best times to buy a home – if you can afford it! Why? Mortgage rates are lower than they have been in many years, housing prices are still low for a long-time, current homeowners are struggling to pay their mortgages, and unemployment is high. What does this mean for potential home buyers? There are a lot of people sitting at home without jobs trying to sell homes they cannot afford. For potential homebuyers, this is good for several reasons: financing is cheap, sellers are desperate and housing prices are relatively low compared to their market peak. You also hold a lot of bargaining chips in your negotiations with sellers. In my personal opinion, now is an excellent time to buy a first home.

How much should I save for a down payment?

There is no hard fast rule on how much you should save for a down payment, but here are some of the things you should consider.

First, if you cannot afford to put down at least 20% of the purchase price of a home, you will have to pay private mortgage insurance, or PMI. PMI is extra insurance that lenders require from most homebuyers who get loans that are more than 80% of their new home’s value. How much does PMI cost? PMI typically costs around 0.5%-1% of your mortgage balance each year. So if you take out a $500,000 mortgage you may pay between $400-$500 a month for PMI. Imagine all of the things you could do with that extra cash! But, it is tough to save 20% for a down payment. Fortunately, once you’ve reached 20% equity threshold in your home, you can stop paying PMI.

So now you are probably asking, what is the minimum amount I should save for a down payment? Personally, I think you shouldn’t be buying a home if you can’t afford to put a down payment of at least 5%; preferably, you can save enough for a 10% down payment. But there are government-supported programs like the FHA loan program that will loan you as much as 97% toward the value of your new home. So technically, you can put down as little as 3%. But remember, the more money you borrow, the more you will have to repay.

Finally, don’t make the foolish mistake of saving all of your extra cash and putting it in a savings account while your credit card balances pile up. Saving for a new home is a good idea, but allowing interest to accumulate on your high interest rate credit cards is a poor financial decision. If you have high interest rate loans accumulating, make sure to pay them off first before you begin committing substantial resources to saving for a home. You can save a little to get started, but focus on repaying your credit cards and other high interest rate loans first before committing substantial resources toward your new home purchase.

What are the costs of buying a house?

When you buy a house, there are a lot of fees that you will need to consider in addition to the down payment. According to a 2011 Bankrate survey, the average closing costs and loan fees for a $200,000 mortgage with a 20% down payment for a person with good credit was $4,070. The numbers vary by state, and they do not include taxes, other government fees and money that you have to put into an escrow account which can add another $5,000+ to your closing costs. You can, however, negotiate with sellers to cover the closing costs, but be prepared to save for more than just your down payment on your new home. For more information on the average closing costs in your state, check out the 2011 Bankrate Closing Cost Survey. Here is a breakdown of the types of closing costs you may see:

Lender Fees
  • Application fee
  • Loan origination fee
  • Rate discount (“points”)
  • Appraisal Fee
  • Lender’s Attorney Fee
  • Underwriting Fee
  • Credit Report Fee
  • Processing Fee

  • National Average: $1,617

    Third Party Fees
  • Home Inspection Fee
  • Title and Title Insurance
  • Survey
  • Buyer’s Attorney Fee
  • Notary Fee
  • Recording Fee
  • Flood Certification
  • Employment Verification

  • National Average: $2,456

    Taxes and Insurance
    • Home Insurance (Get a Quote)
    • Transfer Taxes
    • Partial Month’s Interest
    • Private Mortgage Insurance
    • Processing Fee
    • Tax Escrow Deposit

    • $4,000-$6,000 (varies)

    How much house can I afford?

    So you now know that you should aim to save 10% for a down payment, you understand closing costs, and now you want to know how much house you can afford. To help you do the math, try using the calculator on the right. But here are the primary factors that determine how much house you can afford:

    • Your monthly income
    • Your down payment
    • Your loan term and interest rate
    • Other housing costs like PMI, insurance and taxes
    • Monthly debt payments and fixed obligations

    Why these numbers? There are two numbers you should know: 28% and 36%. 28% is how much experts recommend spending on housing expenses. So if you are spending more than 28% on repaying your mortgage, insurance, taxes, and other housing expenses, you are probably committing too much of your income to your home. Next, 36% is the percentage of your total monthly income experts recommend spending on debt payments including your mortgage, credit cards, student loans, and other loan repayments. So if you are spending more than 36% on debt repayments each month, your debt-to-income ratio is too high. To help you calculate how much you can afford for a home, try using the calculator on the right.

    How much will my first mortgage payment be?

    So you’ve saved for a down payment, know how much house you can afford, understand the fees you’ll have to pay, and know it’s the right time to buy a home. So how much will your mortgage payment be? Mortgage payments depend on a number of factors:

    • Loan Amount
    • Loan Term
    • Interest Rate

    Also, you have to factor in your taxes, homeowner’s insurance and private mortgage insurance if you put down less than 20% on your new home. Today, interest rates are lower than they have been in years. For new home buyers, this is great news! It is cheaper to borrow today than anytime in the last 30 years.

    Historical Chart for 30-Year Fixed Mortgage Rates

    While a longer term mortgage may reduce your monthly payments, you will end up paying more in interest over the life of the loan. For example, if you buy a $250,000 home and put $25,000 down, you will need a $225,000 loan. If you got a $225,000 30-year mortgage at 4.5% interest, you end up paying $185,000 in interest and $1,140 per month. If, on the other hand, you got a 15-year fixed-rate mortgage, not only is your interest rate lower (3.5% vs. 4.5%), but you end up paying only $65,000 in interest and your monthly payment increases to $1,600! You save nearly $120,000 in interest for only $500 more per month. Also, you end up owning your home more quickly because more of your monthly payment goes to pay down principal instead of interest. Either way, it pays to know the numbers in advance. To help you calculate your monthly payments, use this calculator to find out how much your loan will really cost you:

    The Bottom Line

    Buying a home is one of the most important financial decisions and most expensive investments many people make in their entire lives. Now is a good time to buy a home, but be careful not to buy a place you cannot afford. Before you start making offers on properties, be sure to understand how much you will need to save, spend and borrow so you can make sure you are making the best investment for your future. Happy house hunting!

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